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After disappointing investors last quarter, database software firm Oracle
Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> surprised most observers at the close of trading
yesterday by reporting Q3 earnings of $215 million, or $0.22 per share, which
beat expectations by $0.03. In contrast to the company's anemic 3% increase
in software licensing revenues in its November quarter, third quarter worldwide
license and other revenue growth was up 14% year over year. These results
were largely due to a 34% increase in server revenues in the Americas.
Oracle
rose $1 7/16 to $29 3/16 on the day. Despite the company's surprising database
performance, its understandably lackluster performance in Asia -- down 12%
in dollar terms -- will put more pressure on applications to fuel its growth
in 1998. The fact that total applications revenues grew 51% in the quarter
(services and license) is a good sign.
Fisher Scientific International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FSH)") else Response.Write("(NYSE: FSH)") end if %> was a big winner on Wall
Street this week, rising $4 3/4 to $69 1/2 today alone. Last Friday, the
#1 seller of scientific equipment and supplies to laboratories, hospitals,
schools, researchers, and government agencies closed at $51 9/16. Fisher
was recently bought by private investment firm Thomas H. Lee Co. (know for
its profitable investments in Snapple and Rayovac), which, after a reorganization
of Fisher's equity, left an extremely low amount of publicly available company
shares (or float). The float is now 11% of the 8 million shares outstanding,
or roughly 880,000 shares. (Management owns 10% and Lee owns 79% of the
outstanding shares.) So when an unusually large 5-for-1 stock split was announced
on Tuesday, some investors perceived it as a better deal than a plain vanilla
2-for-1 split and rushed to buy the limited supply of shares. As a result,
Fisher's share price has been disproportionately affected by what is, in
essence, a non-event on an intrinsic value basis.
Printed circuit board (PCB) fabricator Merix Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MERX)") else Response.Write("(Nasdaq: MERX)") end if %> connected for a $3 1/8 gain to $20 3/8 after announcing that its fiscal Q3 earnings will come in between $0.22 and $0.24 per share, which is above the First Call mean estimate of $0.15 per share. Revenues are projected at $46.4 million for the quarter, up 29% year-over-year and 4.1% sequentially. Last November, customer Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> lifted its fixed-price policy on the PCBs it buys from Merix. Better gross margins could have possibly come from improved pricing and better utilization rates at its Loveland, Colorado facility acquired from H-P. NationsBanc Montgomery Securities, apparently impressed by the results, upgraded the stock to "buy" from "hold." Merix releases its quarterly financial report on March 23.
QUICK TAKES: Internet browser and application software developer
Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> rose $5/8 to $19 1/2 after
The Wall Street Journal said the company is in talks with Internet
companies Yahoo Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>, America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>, and others regarding the expansion of Netscape's website into a major
Internet gateway... Bone density measuring equipment firm Hologic Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HOLX)") else Response.Write("(Nasdaq: HOLX)") end if %> tacked on $3 to $28 1/4 after the FDA approved the pre-market
application for the company's Sahara clinical bone sonometer, which can help
doctors determine a patient's risk of developing osteoporosis... Ski resort
operators American Skiing Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKI)") else Response.Write("(NYSE: SKI)") end if %> was lifted $1 7/8 to $16
1/8 after Goldman Sachs put the stock on its "recommended list."
Financial management software developer Fundtech Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FNDTF)") else Response.Write("(Nasdaq: FNDTF)") end if %>
jumped $5 5/8 to $18 5/8 in its first day of trading after the company sold
3 million shares in an initial public offering at $13 per share... Amtran
Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTR)") else Response.Write("(Nasdaq: AMTR)") end if %> picked up $2 to $13 3/4 after Salomon Smith Barney
started coverage of the regional air carrier with a "buy" rating and a 12-month
price target of $20 per share... Inova Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INVA)") else Response.Write("(Nasdaq: INVA)") end if %> tacked
on $1 5/8 to $15 7/8 after the wireless communications components maker was
upgraded to "strong buy" from "buy" at UBS Securities... Fast food chain
Pollo Tropical <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: POYO)") else Response.Write("(Nasdaq: POYO)") end if %> flew the coop, gaining $1 5/16 to $9
1/4 after a group led by its CEO offered to buy all of the outstanding shares
of the company at a price of $10 per share, or a 26% premium to the stock's
closing price of $7 15/16 yesterday.
Flat rolled and heavy carbon steel producer Metals USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MUI)") else Response.Write("(NYSE: MUI)") end if %>
climbed $7/8 to $17 1/8 after agreeing to buy structural metals firm Levinson
Steel Co. and completing the acquisition of four other companies. The new
businesses are expected to add more than $100 million in annual revenue,
the company said... Clear Channel Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCU)") else Response.Write("(NYSE: CCU)") end if %> added
$4 9/16 to $95 11/16 after the Justice Department gave its tentative approval
to the radio and TV station operator's proposed merger with billboard advertiser
Universal Outdoor Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UOUT)") else Response.Write("(Nasdaq: UOUT)") end if %>. Universal Outdoor rose
$3 to $63 1/2... Aircraft parts supplier Banner Aerospace <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAR)") else Response.Write("(NYSE: BAR)") end if %>
gained $7/8 to $11 3/4 after majority owner Fairchild Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FA)") else Response.Write("(NYSE: FA)") end if %> filed a regulatory statement with the SEC to increase its stake in the
company to 81% from 66%. Under the proposed deal, Fairchild would swap shares
of its own stock valued at $12.50 per share for up to 4 million Banner
shares.
MedCath Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCTH)") else Response.Write("(Nasdaq: MCTH)") end if %> climbed $1 5/8 to $18 1/8 after two buyout
firms, Kohlberg Kravis Roberts and Welsh, Carson, Anderson & Stowe, agreed
to buy the cardiology and cardiovascular services provider for $240 million,
or $19 per share. The purchase price represents a 15% premium to the stock's
closing price of $16 1/2 yesterday... Truckload air freight delivery service
Landair Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LAND)") else Response.Write("(Nasdaq: LAND)") end if %> rolled $1 3/8 higher to $29 after
receiving a favorable write-up in Investors Business Daily... Database
and direct marketing firm Metromail Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ML)") else Response.Write("(NYSE: ML)") end if %> delivered a $5
5/18 gain to $31 1/2 after agreeing to a cash tender offer by British home
shopping and retailing company Great Universal Stores Plc. Great Universal
will acquire all of the outstanding Metromail shares at a price of $31.50
per share in cash.
Parking lot operator Central Parking Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PK)") else Response.Write("(NYSE: PK)") end if %> got it in gear
today, rising $2 3/16 to $46 1/4 after it sold a total of 2.6 million shares
in a public offering at $44 per share. The offering netted $78.3 million
in proceeds, which the company will use to pay down debt... Cablevision
Systems Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CVC)") else Response.Write("(AMEX: CVC)") end if %> added $2 5/8 to $103 3/4 after Salomon Smith
Barney upgraded the cable TV systems operator to "buy" from "outperform"...
Wireless communications services provider Nextel Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXTL)") else Response.Write("(Nasdaq: NXTL)") end if %> gained $1 7/16 to $29 7/16 after being upgraded to "buy" from "accumulate"
by Merrill Lynch... Exactech Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EXAC)") else Response.Write("(Nasdaq: EXAC)") end if %> soared $1 5/8 to
$7 after LaSalle Street Securities started coverage of the orthopedic implant
devices company with a "long-term strong buy" rating.
Imaging systems developer Peerless Systems Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRLS)") else Response.Write("(Nasdaq: PRLS)") end if %> surged
$3 1/8 to $17 1/2 after Adams Harkness raised its rating on the stock to
"attractive" from "market performer"... Hilton Hotels Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HLT)") else Response.Write("(NYSE: HLT)") end if %> was bumped up $1 13/16 to $34 13/16 on speculation that the company
will buy casino operator Circus Circus Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIR)") else Response.Write("(NYSE: CIR)") end if %> and
then split itself into two companies -- one in the hotel biz and one in the
gaming biz... Telecommunications network management software developer DSET
Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSET)") else Response.Write("(Nasdaq: DSET)") end if %> gained $4 1/16 to $20 1/16 after selling 3.5 million
shares in an initial public offering at $16 per share... Atlantic
Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATLC)") else Response.Write("(Nasdaq: ATLC)") end if %> rose $1 13/16 to $6 13/16 after Business
Week published a favorable article regarding the pharmaceutical company's
cataract surgery technology currently in development.
Danish telecommunications services company Tele Danmark A/S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLD)") else Response.Write("(NYSE: TLD)") end if %> rang up a $3 1/16 gain to $37 7/8 after Merrill Lynch upgraded the company's
near-term rating to "buy" from "accumulate"... Data storage equipment maker
Veeco Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VECO)") else Response.Write("(Nasdaq: VECO)") end if %> moved up $2 11/16 to $31 7/16 after
receiving an order from StorageTek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STK)") else Response.Write("(NYSE: STK)") end if %> for its C-3 Deposition
Cluster Tool... 360 Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XO)") else Response.Write("(NYSE: XO)") end if %> gained $5 13/16 to $35
5/8 on rumors that fellow wireless communications services provider Alltel
Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AT)") else Response.Write("(NYSE: AT)") end if %> may make a bid fror the company at a price as high as
$40 per share... Informix Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IFMX)") else Response.Write("(Nasdaq: IFMX)") end if %> added $23/32 to $8
11/32 after CIBC Oppenheimer upgraded the database technology company to
"buy" from "hold"... Housewares retailer Pier 1 Imports <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PIR)") else Response.Write("(NYSE: PIR)") end if %>
rose $1 1/2 to $30 15/16 after its CEO said he is "confident" that the company
will beat the street's Q4 earnings estimate of $0.31 per share.
Kimberly-Clark Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %>, the company best known for its Huggies
diapers and Kleenex tissues, plunged $6 1/4 to $50 7/8 after announcing late
yesterday that it expects first quarter earnings to fall between $0.54 and
$0.58 a share, below the analysts' mean estimate of $0.63. Although the
manufacturer of personal care, consumer tissue, and away-from-home products
(wipers and washroom materials) hasn't been heavily impacted by the economic
turmoil in Asia, its earnings in Europe were substantially lower than expected
as the company continues to struggle in the region's highly competitive and
fragmented markets. Although its European operations were boosted by the
1995 purchase of rival Scott Paper, Kimberly-Clark has had problems integrating
the two companies' commercial and institutional tissue-product businesses.
Kimberly-Clark expects earnings to improve over the rest of the year as it
realizes savings from its massive restructuring efforts and profits from
recent markups on facial tissue, paper towels, and bathroom tissue in the
U.S.
Women's footwear designer and retailer Nine West Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NIN)") else Response.Write("(NYSE: NIN)") end if %>
fell $1 13/16 to $24 1/2, a 52-week low, after announcing late yesterday
that weak demand and subsequent markdowns at both its retail and wholesale
operations will result in Q4 EPS between breakeven and $0.05 (excluding a
$6.3 million charge for severance pay). The mean EPS estimate listed by First
Call is $0.35. In December, Nine West issued its first warning that Q4 results
would be short of projections, blaming weak demand, shipping problems, and
weakness in Asian economies. Inventory turnover for the company's massive
operations dropped from a sluggish 2.03 in fiscal 1997 to an unwieldy 1.49
on a trailing 12-month basis, reflecting the lack of movement at both the
retail and wholesale level. Assuming the company can work through its fashion
difficulties in the next six months, investors might want to consider the
company's strong retail presence and the fact that it trades at 9 times 1999
estimates of $2.76 per share.
Several oil companies' stocks were driven down with crude oil prices today after OPEC announced that it had postponed a special meeting regarding production cuts until the end of March when all of the ministers are expected to attend. The April crude oil contract on the New York Mercantile Exchange fell $0.14 a barrel today to $14.06. Exploration and production company Abraxas Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AXAS)") else Response.Write("(Nasdaq: AXAS)") end if %> dropped $1 1/2 to $7 1/4; Goodrich Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GDP)") else Response.Write("(NYSE: GDP)") end if %> lost $3/8 to $5 5/8; and Seagull Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGO)") else Response.Write("(NYSE: SGO)") end if %> slipped $1/2 to $16 1/16, and refiner and marketer Wainoco Oil <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WOL)") else Response.Write("(NYSE: WOL)") end if %> dipped $7/16 to $7 3/4.
QUICK CUTS: Shipbuilder Halter Marine Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HLX)") else Response.Write("(AMEX: HLX)") end if %> took
a nosedive, falling $4 5/16 to $14 9/16 after announcing that it expects
fourth quarter earnings to be significantly below analysts' expectations
due to inefficiencies involved in ramping up production to meet increased
demand. The company anticipates earnings to be about breakeven... Urologix
Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ULGX)") else Response.Write("(Nasdaq: ULGX)") end if %>, which makes minimally invasive medical devices for
the treatment of urological diseases, plummeted $3 1/16 to $9 1/2 after
announcing reduced internal sales projections due to slower-than-expected
market development of its Targis System... Commodity chemicals manufacturer
Georgia Gulf Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GGC)") else Response.Write("(NYSE: GGC)") end if %> slid $1 9/16 to $30 1/16 after announcing
that it doesn't expect first quarter earnings to meet analysts' expectations
due to lower demand in Southeast Asia as a result of the economic turmoil
there. The company says Q1 earnings could be less than $0.50 a share, below
the First Call mean estimate of $0.69.
Computer software company CyberMedia Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYBR)") else Response.Write("(Nasdaq: CYBR)") end if %> sank $2 7/16
to $7 5/16 after announcing that it expects to report first quarter sales
between $5 million and $8 million, down from $16.5 million in the year-earlier
period... Web-based courseware publisher UOL Publishing <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UOLP)") else Response.Write("(Nasdaq: UOLP)") end if %>
tumbled $2 1/4 to $8 3/4 after reporting a fourth quarter loss of $0.80 per
share before charges, compared with a loss of $0.78 in the same period last
year... Broadband access equipment company Hybrid Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HYBR)") else Response.Write("(Nasdaq: HYBR)") end if %> lost $1 11/16 to $6 9/16 after announcing that it anticipates first
quarter sales to be about flat with fourth quarter sales of $5.1 million.
The company is experiencing some weakness in demand for its cable and wireless
systems that utilize telephone return.
Alltel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AT)") else Response.Write("(NYSE: AT)") end if %> dropped $2 1/8 to $45 13/16 after Bloomberg
News reported that the telecommunications company was in talks to acquire
360 Communications Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XO)") else Response.Write("(NYSE: XO)") end if %>, a spin-off from Sprint Corp.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %>, for more than $40 a share in stock, or about $4.87 billion.
That would be a substantial premium over 360 Communications' close of $35
5/8 today... STAAR Surgical Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAA)") else Response.Write("(Nasdaq: STAA)") end if %>, which makes a variety
of ophthalmic products for use in microsurgery, shed $1 3/8 to $15 after
reporting fourth quarter earnings of $ 0.12 per share versus $ 0.13 in the
year-earlier period. The First Call mean estimate was $0.17... E*Trade
Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> fell $3 3/16 to $21 3/8 after Deutsche Morgan Grenfell
cut its second quarter earnings estimate for the Internet broker by $0.01
to $0.16 per share. Significant spending by competitors who are developing
brand names is hurting the company, one of the first Internet brokers to
realize the potential of heavy brand-development ad spending.
Color inkjet printer maker ENCAD Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENCD)") else Response.Write("(Nasdaq: ENCD)") end if %> sank $1 5/8 to
$17 3/8 after Prudential Securities and Sutro & Co. both lowered their
ratings on the company to "hold" from "buy"... Magainin Pharmaceuticals
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAGN)") else Response.Write("(Nasdaq: MAGN)") end if %> dropped $3/4 to $6 1/8 after the biopharmaceutical company
announced a fourth quarter loss of $0.31 per share compared with a loss of
$0.26 in the year-earlier period. The company had higher R&D costs for
the quarter mainly due to increases in manufacturing development expenses
and clinical and regulatory costs associated with Cytolex... General acute
care hospitals operator Health Management Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMA)") else Response.Write("(NYSE: HMA)") end if %> slipped
$1 1/8 to $27 13/16 after announcing that it will acquire Regional Healthcare
Inc., which is comprised of two acute care hospitals and an ambulatory surgery
center.
Prosoft I-Net Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: POSO)") else Response.Write("(Nasdaq: POSO)") end if %>, a provider of Internet/intranet
skills training and certification, lost $5/8 to $7 1/8 after reporting a
second quarter loss of $0.19 per share versus a loss of $0.50 per share for
the same prior-year quarter... In Focus Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INFS)") else Response.Write("(Nasdaq: INFS)") end if %>, which
makes personal computer display projectors for audience presentations, plunged
$4 to $16 1/16 after telling analysts and money managers that it has been
forced to mark down prices and that its first quarter gross margins are being
squeezed as a result of heavy competition.
FOOL
ON THE HILL
An Investment Opinion
by Dale Wettlaufer
A Trip to Sotheby's
In looking at the luxury retailing sector, one is confronted with some pretty
boring stuff. Sure, companies like Nordstrom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOBE)") else Response.Write("(Nasdaq: NOBE)") end if %> are great,
but the financials don't really grab you. Nordstrom runs a good business
and definitely differentiates itself from also-rans, but it's not the sort
of thing where a super-normal return on capital makes itself available. In
the last year, the company's return has been due more to an expansion in
its PE multiple than a huge expansion in business. Sotheby's
Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BID)") else Response.Write("(NYSE: BID)") end if %>, on the other hand, does present an interesting
investment study.
Until the early 1990s, the Sotheby's fine art auctions were nearly dominated
by Japanese buyers who were willing to pay nearly any price for the masterworks.
Stories of Van Gogh and Picasso works going at prices in the high tens and
hundreds of millions of dollars haven't been seen as often since the crash
of the Japanese stock market. Conspicuous consumption wasn't supposed to
be fashionable after the "Decade of Greed," but things have turned out
differently in the 1990s. With the U.S. economy hitting on all cylinders
and the global economy creating many new super-wealthy every year, Sotheby's
and its main competitor, Christie's, have been doing quite well in the latter
half of the '90s.
Sotheby's has a number of different operations. The first is the company's
famous auctions. Fine arts accounts for nearly half the company's revenues,
decorative arts (stuff like ceramics and antique furniture) accounts for
a third of revenues, and jewelry, rare books, and "other" comprise about
one-fifth of revenues. In 1996, the company's most famous auction was of
the Jacqueline Kennedy Onassis estate, where the total lot was sold for $34.5
million, over seven times its appraised value.
The company is very interesting because of its competitive strengths -- its
operational moat and brand name, both of which are hard to duplicate by new
entrants to the market or even established competitors. Sotheby's and Christie's
represent a global duopoly in fine art auctions and market making. The collection
of experts that the companies have assembled is unparalleled by smaller market
makers. There may be better appraisers of majolica or Old Masters paintings
not employed by either of these two companies, but it would be extremely
difficult to put together a complete staff to compete with Sotheby's and
Christie's.
Sotheby's revenues have grown at a compounded annual growth rate (CAGR) of
14.2% since 1992, faster that the rate of growth in auction sales. Part of
this comes from a firming price environment in the second half of the decade,
and part comes from growth in revenues in other areas of the business. Operating
earnings have been steadily positive, though somewhat lumpy. Lumpy is fine,
though -- the company is not turning out a stable consumer product like
toothpaste. As long as the company can earn an attractive return on the capital
it uses, an up year here and a down year there don't destroy the ability
of the company's management to create shareholder value.
One way Sotheby's, Christie's, and other auction houses are building their
business is to market to non-billionaire types and dealers and to woo private
buyers -- consumers, basically. Last year, the average ticket at Sotheby's
was under $10,000, so this isn't all Chagall, Faberge, and Asprey being auctioned
here. For the growing number of older Baby Boomers with the kids out of college
and with a good deal of disposable income, including a trip to Sotheby's
in a New York weekend is growing in popularity. And why not? If you can pick
up an early American bureau or a Chippendale piece for less than your local
dealer charges and have fun doing so, the only thing stopping you is not
knowing about the opportunity. That's something that the duopoly is fixing.
The 1996 Jackie O auction didn't hurt at all, either.
With Baby Boomers entering their peak earning years, the trend of private
buyers attending auctions is still on the rise. The fat middle of the Baby
Boom will be turning 50 in 2005, suggesting that there's still lots of room
for Sotheby's to attract new buyers, who after all, turn into sellers down
the road. Remember that Sotheby's is a value-added market maker. More turnover
means more profits for the company.
The company's specialty finance business is another key cog in Sotheby's
financials. This part of the company includes its very high-end real estate
brokerage and its art financing activities. Its finance business is another
area where the company has a great competitive advantage over almost any
financial institution, because the competition doesn't have the expertise
to value collateral against which it can make loans. Chubb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CB)") else Response.Write("(NYSE: CB)") end if %>, in fact, does very well in the niche as an insurer of art collections,
which is very much due to the company's human expertise. Sotheby's advances
loans to owners of art, using the art as collateral, and also finances dealer
purchases of auctioned goods. The staff that appraises art for sale at auction,
then, has its work used in multiple fashions, giving the company good leverage
over its operating expenses. Margins go to those who know how to operate
effectively in niche markets. With a good deal of market share in this specialty
lending market, Sotheby's margins are excellent.
Operating margin for the year was nearly 21% (before a charge). Return on
all capital employed was in the mid-teens, return on invested capital was
close to 18%, and return on equity was nearly 20% for 1997. Looking at 1997's
sales growth of 13.5%, operating earnings growth of 16.5%, and a brand-name
moat backed up with an operational moat, the following multiples aren't
exorbitant:
--price/earnings ratio of 23
--enterprise value/earnings ratio of 27
--price/sale ratio under 3.0
--enterprise value/operating earnings ratio of 16.4
Considering that it's really asset turns that have kept returns on capital
from getting into the really world-class range, and considering further that
the company has in place a plan for increasing that measure of performance
and has demographics on its side there, a continued expansion in operating
profitability looks entirely possible.
Add to this mix the excellent growth of developing markets in Asia and a
resurgent Europe, and the art auction and financing business looks as though
it could resist saturation even with its two main players increasing capital
at a good clip. If Sotheby's can increase capital at a compounded annual
rate of 15% per year over the next five years and continue to improve its
business model to generate better returns on capital devoted to its business,
2003 EPS could get to the $2.75 range. At a 20 P/E multiple, that's shareholder
return of nearly 21% per year going forward. Barring a recession where people
become less magnanimous with their wallets, Sotheby's appears to offer real
potential to create excellent return for its shareholders into the next century.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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